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Introduction

The Financial Secrecy Index ranks jurisdictions according to their secrecy and the scale of their activities. A politically neutral ranking, it is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows.

The index was launched on November 7, 2013.

Shining light into dark places

An estimated $21 to $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions around the world. Illicit cross-border financial flows add up to an estimated $1-1.6 trillion each year. Since the 1970s African countries alone are estimated to have lost over $1 trillion in capital flight, dwarfing their current external debts of 'just' $190 billion and making Africa a major net creditor to the world. But those assets are in the hands of a few wealthy people, protected by offshore secrecy, while the debts are shouldered by broad African populations.

Yet rich countries suffer too: in the recent global financial crisis, European countries like Greece, Italy and Portugal have been brought to their knees by decades of secrecy and tax evasion.

Secrecy jurisdictions - a term we often use as an alternative to the more widely used term tax havens - use secrecy to attract illicit and illegitimate or abusive financial flows.

A global industry has developed involving the world's biggest banks, law practices and accounting firms which not only provide secretive offshore structures to their tax- and law-dodging clients, but aggressively market them. 'Competition' between jurisdictions to provide secrecy facilities has, particularly since the era of financial globalisation took off in the 1980s, become a central feature of global financial markets.

The problems go far beyond tax. In providing secrecy, the offshore world corrupts and distorts markets and investments, shaping them in ways that have nothing to do with efficiency. The secrecy world creates a criminogenic hothouse for multiple evils including fraud, tax evasion and aggressive tax avoidance, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and plenty more. It provides multiple facilities for insiders to extract wealth at the expense of societies elsewhere, creating political impunity and undermining the healthy 'no taxation without representation' bargain that has underpinned the growth of accountable modern nation states. Instead of depending on tax, many countries are forced to depend on foreign aid.

This is not just a 'developing country' issue either: it hurts citizens of rich and poor countries alike.

In identifying the providers of international financial secrecy, the Financial Secrecy Index reveals that the traditional stereotype of tax havens is misconceived. The world’s most important providers of financial secrecy are not small, palm-fringed islands as many suppose, but some of the world’s biggest and wealthiest countries.

It shows that the illicit financial flows that keep developing nations poor are predominantly enabled by rich OECD member countries and their satellites, which are the main recipients of or conduits for these illicit flows. The trillion-dollar figure for annual illicit financial flows out of developing countries, above, compares with just US$130 billion or so in global foreign aid. So for every dollar of aid provided by OECD countries to developing nations, ten dollars or so flow back, under the table, towards OECD nations and their offshore satellites.

The implications for global power politics are clearly enormous, and help explain why widely heralded international efforts to crack down on tax havens and financial secrecy have been rather ineffective, despite many fine words from G20 and OECD countries: for it is these countries -- which receive these gigantic inflows -- that set the rules of the game.

Although there have been some positive changes since our last index in 2011, the infrastructure of global financial secrecy remains alive and well.

For too long, governments and campaigners concerned with cross-border finance focused on narrow problems such as terrorist financing and on certain kinds of money laundering, while ignoring much bigger flows involving tax evasion, abusive trade pricing and a range of other crimes and abuses. These larger problems operate through, and perpetuate, exactly the same mechanisms of offshore financial secrecy that facilitate cross-border flows of terrorist and drug financing. Tackling the smaller issues, while ignoring the bigger ones, cannot work.

The only realistic way to address these problems comprehensively is to tackle them at root: by directly confronting offshore secrecy and the global infrastructure that creates it. A first step towards this goal is to identify as accurately as possible the jurisdictions that make it their business to provide offshore secrecy.

This is what the FSI does. It is the product of years of detailed research by a dedicated team, and there is nothing else like it out there.